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entitled 'Medicare Part D Prescription Drug Coverage: Federal Oversight 
of Reported Price Concessions Data' which was released on October 30, 
2008. 

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September 30, 2008: 

The Honorable Henry A. Waxman: 
Chairman: 
Committee on Oversight and Government Reform: House of Representatives: 

Subject: Medicare Part D Prescription Drug Coverage: Federal Oversight 
of Reported Price Concessions Data: 

Dear Mr. Chairman: 

To help Medicare beneficiaries manage the rising cost of prescription 
drugs, Congress passed the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA), which established the outpatient 
prescription drug benefit known as Medicare Part D.[Footnote 1] The 
benefit was first available in January 2006, and that year it provided 
federally subsidized prescription drug coverage for nearly 28 million 
beneficiaries at a cost of $47.4 billion--almost 12 percent of total 
Medicare spending. The Centers for Medicare & Medicaid Services (CMS), 
part of the Department of Health and Human Services (HHS), manages and 
oversees the Part D program. 

Part D sponsors--entities that enter into contracts with 
Medicare[Footnote 2]--administer the benefit and compete for 
beneficiary enrollment. To provide coverage, the sponsors often enter 
into contractual relationships with pharmacy benefit managers 
(PBM),[Footnote 3] drug manufacturers, and retail pharmacies, among 
others. The Part D program relies on sponsors to generate prescription 
drug savings, in part through their ability to negotiate price 
concessions, such as rebates and discounts, with these entities. 
Sponsors must report the price concession amounts to CMS and pass price 
concessions on to the program.[Footnote 4] CMS uses the reported data 
to calculate final plan payments, so accurate data are necessary to 
ensure accurate payments. CMS is responsible for ensuring that the 
reported price concessions data are reliable. 

We and others have reported challenges to the oversight of federal 
prescription drug programs that rely on privately reported data, noting 
significant financial consequences for the federal government resulting 
from inaccurate reporting.[Footnote 5] You asked us to provide 
information on the price concessions data CMS collects. Specifically, 
we examined how CMS ensured the reliability of the 2006 price 
concessions data, the most recent complete year of data for which CMS 
had conducted oversight activities. 

To examine CMS's oversight of the reported price concessions data, we 
reviewed laws, regulations, and guidance related to Part D reporting 
requirements and CMS's oversight of price concessions data, including 
audit guidelines and methodologies. We also interviewed CMS officials 
responsible for collecting and overseeing the data to learn about its 
purpose and use, oversight activities, and any challenges to the 
oversight. We interviewed CMS officials from the Center for Drug and 
Health Plan Choice, who manage Part D data collection efforts and plan 
payment activities, and from the Office of Financial Management, who 
manage Medicare's financial audits. Our review focused primarily on the 
price concessions data contained in the 2006 Direct and Indirect 
Remuneration (DIR) reports, which were used to determine the final 
program payment reconciliation. We also examined the management of 
quarterly reported price concessions data. We conducted this work from 
April 2008 through September 2008 in accordance with generally accepted 
government auditing standards. Those standards require that we plan and 
perform the audit to obtain sufficient, appropriate evidence to provide 
a reasonable basis for our findings and conclusions based on our audit 
objectives. We believe that the evidence obtained provides a reasonable 
basis for our findings and conclusions based on our audit objectives. 

Background: 

For each Part D program year, CMS requires Part D sponsors to submit 
two types of reports that reflect price concessions data--an annual DIR 
report and quarterly reports of drug manufacturer rebates, discounts, 
and other price concessions data. Many sponsors have multiple contracts 
with CMS, with each contract offering one or more distinct Part D 
plans.[Footnote 6] Sponsors report the annual DIR data by plan and 
report the quarterly data by sponsor or contract. 

Part D Program Year: 

The Part D program year runs from January 1 through December 31. Part D 
sponsors submit separate annual bids for each plan in June preceding 
the program year--therefore bids for program year 2006 were submitted 
in June 2005. CMS pays sponsors prospectively based on those bids, 
which include estimated program costs and estimated price concessions 
the: 

sponsors will receive during the program year. After the close of a 
program year, CMS reconciles payment disbursements based on actual 
costs incurred. Actual costs must reflect actual plan enrollment and 
utilization, and must be net of price concessions reported in the DIR 
data. The 2006 DIR data were reported to CMS in July 2007 and the 
reconciliation payments were calculated in September 2007. 

Annual DIR Reports for Payment Reconciliation: 

The DIR reports include aggregate values of the types of price 
concessions each plan received from any source, such as those received 
from pharmacies or rebates received from drug manufacturers. Because 
the DIR reports are used to calculate payments, they are subject to 
audit and sponsors must attest to their accuracy. CMS is required to 
conduct financial audits of payment data, including DIR data, for at 
least one-third of the Part D sponsors each program year.[Footnote 7] 
It contracts with external auditors to conduct the audits. 

DIR reporting guidance states that any transactions that effectively 
lower the cost to the plan for purchasing drugs should be reported as 
price concessions. For example, Part D sponsors typically pay PBMs for 
the cost of drugs provided to their plan enrollees. PBMs also receive 
payments from drug manufacturers based on contractual agreements for 
managing and distributing drug rebates to the sponsors--referred to as 
rebate administration fees. According to the guidance, any amount of 
the rebate administration fees that exceeds the fair market value of 
the service should be reported as price concessions. The guidance does 
not specifically define the fair market value of these or other types 
of fees specified in sponsors' or PBMs' contracts. When reporting DIR 
data, sponsors may also have to consider how to allocate price 
concessions that apply to both their Part D and other business. DIR 
reporting guidance does not specify how sponsors should allocate price 
concessions, but it requires that the sponsors use a reasonable 
allocation method and maintain documentation to explain and support 
their allocation methods.[Footnote 8] 

Quarterly Pharmaceutical Manufacturer Rebates, Discounts, and Other 
Price Concessions Reports: 

The quarterly price concessions reports include some of the information 
captured in the DIR reports; however, there are some key differences. 
The quarterly reports include price concessions received only from drug 
manufacturers, while the annual DIR reports include price concessions 
from any source, such as pharmacies. In addition, the quarterly reports 
include price concessions by drug rather than in aggregate, detailing 
any manufacturer rebates by drug. They also include detailed 
descriptions, values, and justifications for nonrebate discounts and 
other price concessions from drug manufacturers, such as coupons. The 
quarterly reported data are not used to determine program payments and 
CMS does not subject these data to financial audit. 

Results in Brief: 

CMS conducted checks of the reported price concessions data prior to 
reconciling the 2006 payments to identify certain potential problems, 
and has initiated about half of its planned financial audits to examine 
the data in more detail. According to CMS officials, they conducted 
data checks prior to payment reconciliation to identify potential 
problems such as outliers and questionable data. Where officials 
identified problems with the data, they contacted sponsors and resolved 
most problems before payment reconciliation. CMS officials said they do 
not expect the data checks to identify all possible problems, but they 
rely on them as a vital step to ensure a certain level of confidence in 
the data in the absence of sufficient time to fully review or audit 
them before payment reconciliation. The officials said that the 
financial audits, which occur after payment reconciliation, allow them 
to more fully evaluate the accuracy and validity of the data. CMS 
intends to complete 169 financial audits of Part D contracts for 
program year 2006. Officials expect to complete about half of the 
planned audits by October 2008--within CMS's targeted timeline for 
conducting all of the audits of 2006 data. According to CMS officials, 
the remaining audits were delayed due to financial constraints and CMS, 
therefore, funded the audits from two program year budgets. The 
officials expected to complete the delayed audits by October 2009 and 
did not expect that audits of program year 2007 data would be similarly 
delayed. In addition, officials noted that variation in defining and 
reporting price concessions data, such as variation in how sponsors 
allocate manufacturer rebates between their Part D plans and other 
business, would likely create oversight challenges. We received written 
comments on a draft of this report from HHS. HHS stated that the draft 
correctly characterized the financial audit program, but did not 
adequately emphasize the robustness of CMS's other oversight 
activities. We revised the draft to reference further detail about 
CMS's data checks and clarified our characterization of their purpose. 

CMS Conducted Data Checks to Identify Certain Potential Problems, 
Initiated About Half of the Required Audits, and Acknowledged Certain 
Oversight Challenges: 

CMS conducted checks of the reported price concessions data prior to 
reconciling the 2006 payments and will rely on the financial audits 
begun after the reconciliation to more fully evaluate the accuracy and 
reliability of the data. Officials acknowledged certain problems 
inherent in defining and reporting price concessions data that may 
present challenges for oversight. 

Data Checks Conducted Prior to Payment Reconciliation Are Intended to 
Identify Outliers and Questionable Data: 

CMS officials stated that they conducted 10 data checks to identify 
certain potential problems in the 2006 DIR, such as outliers and 
questionable data, before using the data for payment reconciliation and 
audit.[Footnote 9] Officials acknowledged that the checks provided a 
high-level review, and were not expected to identify all possible 
problems with reported data. However, CMS officials said they used the 
data checks because they lacked the time to conduct audits or more 
detailed analyses before the data were used for payment 
reconciliation.[Footnote 10] They believed the checks were vital to 
ensure a certain level of confidence in the quality of data. The 10 
data checks included three types of analyses: 

* Comparisons of the 2006 DIR data with the estimated price concessions 
data reported in each plan's program year 2008 bids, which were 
submitted in June of 2007. CMS officials expected plans' 2006 DIR data 
to mirror their 2008 bid data because plans were generally required to 
use their 2006 experience to project costs for 2008.[Footnote 11] 

* Comparisons of the 2006 DIR data with an annual sum of the data from 
the quarterly reports of manufacturer price concessions. Because the 
DIR data include price concessions from more sources than the quarterly 
data, they sought to ensure that the value of the DIR data was the 
greater of the two. 

* Checks for outliers. For example, among plans with similar 
characteristics, officials compared plans' reported DIR data in 
relation to their total drug spending to determine whether any reported 
DIR seemed particularly high or low. 

CMS officials said they followed up with sponsors whose data checks 
identified problems with the program year 2006 DIR data. Where they 
found inconsistencies, officials contacted the sponsors to determine 
whether the inconsistencies could be reasonably explained. In addition, 
CMS sent warning letters to 22 sponsors that had not submitted DIR 
reports by the reporting deadline of July 9, 2007, indicating that they 
should submit their data by July 25, 2007, or they may be subject to 
potential enforcement actions.[Footnote 12] Officials told us that most 
problems were resolved before payment reconciliation through 
conversations with sponsor representatives. One sponsor that did not 
submit data by July 25 was reported to CMS auditors for their use in 
determining the sponsors to target for future audit.[Footnote 13] 

CMS officials stated that the newness of the program and other factors 
affected the usefulness of the data checks, and they expected that some 
challenges would diminish as they gain program experience. For example, 
they stated that the value of the comparison between the 2006 DIR data 
and the estimated price concessions data from the 2008 bids was limited 
because the bids were based on only 1 year of actual experience with 
Part D enrollment and utilization. Officials believed that as sponsors 
gained Part D program experience, the accuracy of bids and the 
usefulness of these comparisons could improve. In addition, while the 
officials said that comparisons of DIR data across like plans may have 
identified outliers, they noted that differences in reported DIR data 
may not always indicate problems because they may be attributable to 
differences in plan design or enrollees' characteristics and drug 
utilization. Officials believed that as they gained experience 
reviewing DIR data across multiple plans, their ability to identify 
possible problems through the data checks would improve. However, CMS 
officials acknowledged that the data checks would always be limited to 
identifying certain potential problems or inconsistencies in reported 
data. For example, CMS officials told us that the comparison of the DIR 
data with the quarterly manufacturer price concessions data provided 
only a high-level check for reporting consistency because the two sets 
of data did not capture the same information. 

Audits Are Intended to Evaluate the Reliability of the Price 
Concessions Data, and About Half of the 2006 Audits Were Delayed: 

CMS officials stated that they intend to use the financial audits 
conducted after payment reconciliation to evaluate the accuracy and 
reliability of the DIR data. According to the 2006 audit plan, 
financial audits should include reviews of each plan's DIR calculations 
and price concessions allocation methods, as well as DIR calculations 
provided to the sponsors by their PBMs. The audit plan specifies that 
auditors should attempt to determine if PBMs retained any rebates not 
reported in the DIR data.[Footnote 14] Auditors must also evaluate a 
sample of payment and revenue reports and supporting documentation to 
identify and test any unreported DIR. The audit plan requires auditors 
to document methodologies and any findings and conclusions for each 
audit. CMS officials stated that if financial audits identify problems 
with a sponsor's DIR reports or CMS's payment reconciliation, CMS will 
recalculate payment reconciliation for that sponsor and target them for 
future audit. The 2006 audits targeted contracts based on total 
enrollment and spending, not on suspected problems in reporting 
financial data, such as the DIR data. Officials told us that future 
audits would likely target sponsors based on reporting or compliance 
problems identified in the data checks and previous financial audits. 

Officials stated that about half of the 2006 audits were delayed. To 
fulfill statutory requirements, CMS planned to contract for 169 
financial audits of Part D contracts representing plans managed by 97 
different sponsors. CMS's target timeline for receiving final results 
of the financial audits is within 22 months of the end of the program 
year--which would be October 2008 for the 2006 program year.[Footnote 
15] CMS contracted for 81 of the audits to be completed by October 
2008--within the target timeline. According to CMS officials, the 
remaining audits were delayed due to financial constraints and CMS, 
therefore, funded the audits from two program year budgets. Officials 
said they expect to begin the remaining 88 audits of program year 2006 
data in October 2008, and expect completed results for those audits by 
October 2009.[Footnote 16] (See fig. 1.) CMS officials did not expect 
that audits of program year 2007 data would be similarly delayed. 
According to officials, as of July 11, 2008, they had received final 
results from one program year 2006 audit which found no problems 
related to the DIR data. 

Figure 1: Financial Audit and Other DIR Data Oversight Timeline, 
Program Years 2006 and 2007: 

[See PDF for image] 

Source: GAO analysis of CMS information. 

[End of figure] 

Variation in Defining and Reporting of Price Concessions Data May 
Present Oversight Challenges: 

CMS officials acknowledged that certain problems inherent in defining 
and reporting price concessions data may present challenges for 
oversight. For example, they told us that developing accurate 
assessments of the fair market values of administrative fees for 
services provided by sponsors and their PBMs presented a challenge 
because of differences in how these services are defined in sponsors' 
and PBMs' contracts with other entities.[Footnote 17] Officials 
expected that as they gather information from completed audits, their 
understanding of the fair market value of administrative fees might 
improve; however, the complexity of and variation in contractual 
relationships will continue to make accurate assessments a challenge. 
Similarly, because of variation in contractual relationships, plan 
designs, and enrollee characteristics across plans, it may not be 
possible to establish guidance on how sponsors should allocate rebates 
between their Part D and other businesses that cover every 
circumstance. For example, certain drug rebates are awarded based on a 
plan's formulary.[Footnote 18] Sponsors that use the same formulary for 
their Part D and other plans may choose to allocate rebates equally 
among them, whereas sponsors that use different formularies across 
various plans may choose an allocation method that accounts for the 
differences. 

Agency Comments and Our Evaluation: 

We received written comments on a draft of this report from HHS (see 
encl. I). HHS stated that the draft correctly characterized the 
financial audit program, but did not adequately emphasize the 
robustness of CMS's other oversight activities or the budget challenges 
that CMS faced in conducting its oversight. Specifically, HHS expressed 
concern that we did not adequately characterize CMS's data checks 
conducted prior to payment reconciliation, including their thoroughness 
and complexity. While we summarized the types of data checks CMS 
conducted, we did not include extensive detail, in part, because a 
document CMS provided that described the data checks was marked 
"confidential." However, in light of HHS's comments, we revised the 
report to reference the updated document describing the data checks 
that HHS provided along with its comments. We also revised the report 
to reflect that CMS believes the data checks will identify more than 
obvious problems and considers the data checks vital to ensuring 
confidence in the data prior to payment reconciliation. Although CMS 
conducts these data checks prior to payment reconciliation, we agree 
with HHS that the financial audits conducted after reconciliation 
provide the most complete review of the DIR data for accuracy. 
Regarding the budget challenges, HHS expressed concern that we did not 
adequately address the funding challenges CMS faced in carrying out its 
statutory audit requirements. Our report acknowledges that a portion of 
the financial audits of 2006 data were delayed due to financial 
constraints; however, a full analysis of the adequacy of CMS's budget 
was beyond the scope of this report. HHS also provided certain 
additional comments, including technical comments, which we 
incorporated as appropriate. 

As arranged with your offices, unless you publicly announce the 
contents of this report earlier, we plan no further distribution until 
30 days from the date of this report. At that time, we will send copies 
to the Secretary of HHS, the Acting Administrator of CMS, and 
interested parties upon request. The report will also be available at 
no charge on GAO's Web site at [hyperlink, http://www.gao.gov]. If you 
or your staff have any questions regarding this report, please call me 
at 202-512- 7114. Contact points for our Offices of Congressional 
Relations and Public Affairs may be found on the last page of this 
report. Randy DiRosa, Assistant Director; Rebecca Abela; Gerardine 
Brennan; Timothy Walker; and Margaret Weber were major contributors to 
this report. 

Sincerely yours, 

John E. Dicken Director, Health Care: 

Enclosure: 

Comments from the Department of Health and Human Services: 

Department Of Health & Human Services: 
Office Of The Secretary: 
Assistant Secretary for Legislation: 
Washington, DC 20201: 

September 19, 2008: 

John Dicken: 
Director, Health Care: 
Government Accountability Office: 
441 G Street NW: 
Washington, DC 20548: 

Dear Mr. Dicken: 

Enclosed are the Department's comments on the U.S. Government 
Accountability Office's (GAO) draft report entitled: "Medicare Part D 
Prescription Drug Coverage: Federal Oversight of Reported Price 
Concessions Data" (GAO-08-1074). 

The Department appreciates the opportunity to review and comment on 
this report before its publication.
Sincerely, 

Signed by: 

Jennifer R. Luong: 

for: 

Vincent J. Ventimiglia:  
Assistant Secretary for Legislation: 
Attachment: 

Department Of Health & Human Services: 
Centers for Medicare & Medicaid Services 200 Independence Avenue SW 
Washington, DC 20201: 

Date: September 16, 2008: 

TO: Vincent J. Ventimiglia, Jr.: 
Assistant Secretary for Legislation: 
Department of Health and Human Service: 

From: Kerry Weems: 
Acting Administrator: 

Subject: Government Accountability Office (GAO) Draft Correspondence: 
Medicare Part D Prescription Drug Coverage: Federal Oversight of 
Reported Price Concessions Data" (GAO-08-1074R): 

Thank you for the opportunity to comment on the draft correspondence 
entitled, "Medicare Part D Prescription Drug Coverage: Federal 
Oversight of Reported Price Concessions Data (GAO- 08-1074R): As 
described in detail below. we believe we have a robust process for 
ensuring the accuracy of plan reported price concession data. Moreover, 
we have continued to enhance our pre-reconciliation and audit review 
procedures as we continue to gain experience with the program. While we 
feel that the Centers for Medicare & Medicaid Services (CMS) and GAO 
staffs have worked collaboratively on this correspondence we want to 
share the following comments and concerns related to the depiction of 
CMS' oversight of the price concessions data. 

While you have correctly characterized the financial audit program. 
your correspondence fails to represent the funding challenges CMS faced 
in carrying out the statutory one third financial audit requirements. 
We believe it is important to note that CMS made a request for funds. 
as part of a proposal to fund program integrity and oversight 
activities through an adjustment to discretionary spending totals. in 
fiscal year (FY) 2007 ($118 million) and FY 2008 ($183 million) and 
that in each year Congress failed to enact our budget request. This 
request would allow us to fully fund the required audits. Nevertheless 
CMS has taken measures to achieve timelier audit results with the 
funding levels available. We are revising the audit protocols for the 
remaining FY 2006 audits to perform them in the most efficient manner. 
We are eagerly awaiting our audit results. We fully expect that this 
information will prove helpful and will form the basis for future 
revisions to the financial audit protocol process. 

We have several concerns regarding the characterization of our process 
for ensuring the reliability of the price concessions data used to 
determine Part D payments. In light of the challenges in ensuring the 
accuracy of payments that are dependent upon self-reported data. we 
have created and implemented a rigorous and comprehensive process for 
reviewing and validating these data. The first step of this two-step 
process involves in-depth review and analysis of the Direct and 
Indirect Remuneration (DIR) data submitted by Part D sponsors prior to 
the Part D payment reconciliation. These reviews are effective in 
identifying and resolving potential errors in the DIR data and also 
hold Part D sponsors accountable for potential omissions or 
inaccuracies in their DIR data. This first step is vital to ensure that 
we have a certain level of confidence in the quality of the DIR data 
before using it in the determination of Part D payments. In recognition 
of the challenges other federal programs have faced in relying on 
similar types of data, we are also conducting audits in the second step 
of our process to perform the most rigorous and detailed review of 
these data possible. While this step is currently conducted after the 
Part D payment reconciliation, the results of the audits will allow CMS 
to adjust Part D payments and seek corrective action by Part D sponsors 
as appropriate. 

Our process of conducting an initial review prior to payment followed 
by comprehensive post- payment audits mirrors the processes implemented 
under other federal programs faced with the similar data challenge of 
ensuring accurate and timely payments when payment is based upon self 
reported data. For example. in the Fee-for-Service program, CMS 
performs data checks on the claims received, pays these claims as 
appropriate within the required timeframe, and then performs audits 
after the claims are paid to identify potential fraud and enable the 
agency to take corrective action as appropriate. While we acknowledge 
that our process will improve over time as the Part I) program matures 
and we learn more about the DIR data, we are confident that this 
process will ensure accurate and timely payments. 

In addition, the correspondence suggests that the purpose of the data 
reviews, which CMS conducts on the DIR data prior to Part D Payment 
Reconciliation, is to identify obvious problems. This description fails 
to adequately convey the complexity and thoroughness of the reviews and 
is not entirely accurate. While we admit that these reviews are limited 
by the data available to CMS prior to payment reconciliation, these 
data reviews are quite thorough. These reviews are designed to identify 
potential inaccuracies as well as omissions in the DIR data submitted 
to CMS. While audits are required to conduct the most complete review 
of the DIR data for accuracy. the discrepancies identified and 
addressed in these data reviews are by no means limited to obvious 
problems. Accordingly, we recommend the draft correspondence be revised 
to include a more in-depth explanation of the reviews conducted prior 
to payment reconciliation to better illustrate the purpose and scope of 
these reviews. A listing of these reviews is provided below. We note 
that as we gain experience with the data and reviews, we will reline 
and add reviews to better screen for potential errors and omissions in 
the DER data. For example, during the review of the 2007 DIR data, we 
added three additional data reviews. A full list of these reviews is 
included as Attachment A. 

Furthermore, we recommend that the correspondence be revised to include 
additional discussion of the resolution of problems identified in DIR 
data after payment reconciliation. We note that if any problems are 
identified in the DIR data after payment reconciliation, whether by CMS 
during the financial audits or by plan sponsors during their own 
internal audits and reviews. CMS has the option to re-open the Part D 
sponsor's payment reconciliation and recalculate its Part D payments 
based on the corrected DIR data. 

Finally, the correspondence indicates that the DIR reporting guidance 
does not specify how sponsors should allocate price concessions. 
However. the correspondence does not take into account the actions that 
we have taken to address the allocation of price concessions. In our 
guidance, we require Part D sponsors to apply a reasonable allocation 
methodology when allocating their DIR to the plan level. In addition, 
Part D sponsors are instructed to maintain documentation of the 
allocation methodologies used. While CMS has not currently provided 
guidance regarding appropriate or reasonable methodologies for 
allocating price concession on the DIR Report for Payment 
Reconciliation, we expect to provide guidance on this issue in the 
future. We are actively gathering information regarding the allocation 
methodologies used by Part D sponsors through the DIR data and our 
audits of these data. Specifically, beginning with the 2007 DIR Report 
for Payment Reconciliation, we have required Part D sponsors to provide 
a description of the methodologies used for allocating their DIR data. 
As we review this information and the results of the audits, we expect 
to he able to develop additional guidance for Part D sponsors regarding 
reasonable allocation methodologies for the DIR data reported to CMS.

Also, we have provided additional technical comments (see Attachment 
B). 

Attachments: 

Attachment A-DIR Data Reviews: 
Attachment B-Technical Comments: 

Attachment A-DIR Data Reviews: 

1. No DIR report submitted: The CMS identifies active Part D plans with 
actual enrollment which did not submit a DIR Report for Payment 
Reconciliation. 

2. DIR reported less than or equal to total rebates on quarterly 
reporting: The CMS compares the rebate amounts reported on the DIR 
report for each parent organization to the rebates reported on the 
quarterly rebate reports for the corresponding contract year. Parent 
Organizations with rebate amounts on the DIR report which are less than 
or equal to the rebate amounts reported on the quarterly rebate reports 
are identified as outliers. 

3. Total DIR Reported = $0: The CMS reviews the DIR data to identify 
those Part D plans with $0 Total DIR reported on the DIR Report for 
Payment Reconciliation. Part D sponsors are asked to provide an 
explanation of why the plan had $0 DIR to report. 

4. DIR as a percent of total drug costs (High): CMS compares the total 
DIR amount reported to the total gross covered drug cost reported on 
their Prescription Drug Event (PDE) records and their total enrollment 
for the contract year. Using these data, CMS identifies as outliers, 
Part D plans with unusually high total DIR as a percentage of total 
gross covered drug cost or per member per month. 

5. DIR as a percent of total drug costs (Low): The CMS compares the 
total DIR amount reported by the Part I) sponsor to the total gross 
covered drug cost reported on its Prescription Drug Event (PDE) records 
and its total enrollment for the contract year. Using these data, CMS 
identifies as outliers, Part D plans with unusually low total DIR as a 
percentage of total gross covered drug cost or per member per month. 

6. Negative Total DIR: The CMS reviews the DIR data to identify those 
Part D plans with a total DIR value less than $0 reported on the DIR 
Report for Payment Reconciliation. 

7. Comments in All Other DIR text description: On the DIR Report for 
Payment Reconciliation. Part D sponsors are permitted to report any 
applicable DIR that is not captured on the rest of the DIR report in 
the column DIR 7- "All Other DIR". However, Part D sponsors are 
required to provide a description of the price concession along with 
the associated dollar amount in the column "Other Text Description" for 
any DIR amount reported in the "All Other DIR" column. CMS reviews the 
descriptions provided in the "Other Text Description" column of the DIR 
Report to determine if the appropriate price concessions were included 
and to ensure that claim amounts for rejected PDE were not included on 
the report. 

8. All Other DIR as a percent of Total DIR (High): The CMS compares the 
DIR reported in the `"All Other DIR" column of the DIR Report for 
Payment Reconciliation to the total DIR amount reported. Those Part D 
plans with DIR data reported in the "All Other DIR" column which is 
unusually high as a percent total DIR reported are identified as 
outliers. 

9. DIR reported relative to rebates reported and projected in 2008 
bids: The CMS compares both the rebate amounts reported in the bids for 
baseline experience and the rebate amounts projected for the following 
contract year to the total DIR amount reported on the DIR Report for 
Payment Reconciliation. Contracts where either the 2006 base period 
experience rebate percentage or the projected 2008 base period rebate 
percentage differs significantly from the total DIR percentage are 
identified as outliers. 

10. Comparison to Prior Year's DIR Data (Beginning with 2007 DIR Data): 
The CMS compares the total DIR for the prior contract year to the total 
DIR reported for the current contract year reported. To conduct this 
analysis, CMS determines a Part D plan's DIR relative to its total drug 
cost for both contract years. In addition, CMS compares each plan's 
average per member per month DIR for both contract years using the 
plan's enrollment data. Plans with significant changes in DIR from the 
previous contract year are identified as outliers. 

11. DIR Values Repeated Across Plans or Contracts (Beginning in 2007): 
The CMS reviews the total DIR reported for the Part D plans offered 
under each contract to identify Part D contracts where the same non-
zero DIR value is reported for all of the Part D plans under the 
contract. In addition, CMS reviews the DIR reported to identify Part D 
plans where the same DIR value was repeated across DIR categories. 

12. Top Ten Analysis (Beginning in 2007): The CMS conducts additional 
reviews on the DIR data submitted by the 10 Parent Organizations with 
the greatest total Part D enrollment. Conference calls are conducted 
with the Part D sponsors to address any potential data discrepancies 
identified.

[End of section] 

Footnotes:  

[1] Pub. L. No. 108-173,  101, 117 Stat. 2066, 2071-2152 (inserting a 
new Part D into title XVIII of the Social Security Act (SSA)). 

[2] Part D sponsors are typically private health plans or insurers. In 
addition to their Medicare business, Part D sponsors typically offer 
drug coverage in the private insurance market. 

[3] Health insurers may contract with PBMs to help manage their 
prescription drug benefits. PBMs often negotiate drug prices with 
pharmacies and drug manufacturers on behalf of health plans and, in 
addition to other administrative, clinical, and cost containment 
services, process drug claims for the health plans. 

[4] See SSA sections 1860D-2(d)(2), -15(b)(2) and -15(e)(1)(B) (as 
added by the MMA) (codified at 42 U.S.C.  1395w-102(d)(2), -
115(b)(2), and 
-115(e)(1)(B)). 

[5] See GAO, Prescription Drugs: Oversight of Drug Pricing in Federal 
Programs, GAO-07-481T (Washington, D.C.: Feb. 9, 2007). In addition, 
the HHS Office of Inspector General (HHS-OIG)--responsible for 
protecting HHS programs against fraud, waste, and abuse--identified 
oversight of Medicare Part D as its top management and performance 
challenge for fiscal year (FY) 2007 due to the complex structure and 
the cost of the program. See HHS FY 07 Agency Financial Report.: FY 
2007 Top Management and Performance Challenges Identified by the Office 
of the Inspector General (Washington, D.C.: Nov. 15, 2007). In this 
report the HHS-OIG also estimated that Part D sponsors would owe 
Medicare a net total of $4.4 billion after the 2006 final plan payment 
adjustments. 

[6] Plans offered under the same contract may differ in their benefit 
design, such as the specific drugs the plans covered and the premiums 
they charged. 

[7] SSA section 1860D-12(b)(3)(C) (as added by the MMA) (codified at 42 
U.S.C.  1395w-112(b)(3)(C)); 42 C.F.R.  423.504(d) (2007). 

[8] In addition to CMS's financial audits, the HHS-OIG is examining the 
documentation used to support DIR and other reported price concessions 
data. For example, it is initiating audits of reported DIR data and a 
review of a sponsor's support for its estimates of price concessions 
included in its bids. 

[9] In commenting on a draft of this report, HHS provided an updated 
list that included 12 data checks that CMS intends to use in its review 
of the 2007 DIR reports (see encl. I, attachment A). 

[10] The 2006 DIR data were submitted in July 2007. CMS calculated 2006 
payment reconciliation in early September 2007 and sent reports to 
sponsors in early October 2007 informing them of their adjusted 
payment. 

[11] Bids for a given program year are due to CMS by June of the 
previous year. When CMS reviewed the 2006 DIR data, the bids for 
program year 2008 were the most recently available. 

[12] The letters pertained to 40 contracts and 175 plans offered by the 
22 sponsors. 

[13] Although CMS expects to audit at least one-third of the Part D 
sponsors each program year--auditing all sponsors over a 3-year cycle-
-it may audit certain sponsors more than once every 3 years if, for 
example, there are questions about prior data submissions. 

[14] For program year 2006, plans were not required to report certain 
DIR retained by PBMs. However, auditors were instructed to inform plans 
that beginning with program year 2007 all DIR, even if kept by a PBM, 
should be reported as DIR to CMS. 

[15] The statutory requirements relating to the Medicare Part D audits 
do not specify a time frame for completing the audits. SSA section 
1860D-12(b)(3)(C) (as added by the MMA) (codified at 42 U.S.C.  1395w- 
112(b)(3)(C)); 42 C.F.R.  423.504(d) (2007). CMS's target timeline is 
consistent with the timeline CMS established for Medicare Advantage 
plans. In commenting on a previous GAO report, CMS indicated that 
audits of Medicare Advantage organizations should be completed within 3 
years from the time bids were accepted--about 22 months after the end 
of the program year. See GAO, Medicare Advantage: Required Audits of 
Limited Value, GAO-07-945 (Washington, D.C.: July 30, 2007). 

[16] According to CMS officials, CMS spent $4.5 million to complete the 
first 81 of 169 program year 2006 financial audits and expects to spend 
$4.8 million to complete the remaining 88. 

[17] By statute, CMS may not interfere in the negotiation of sponsors' 
contracts with PBMs and other entities, and therefore cannot dictate 
terms. SSA  1860D-11(i) (as added by the MMA) (codified at 42 U.S.C.  
1395w-111(i)). 

[18] A formulary is a list of drugs covered by the plan, which often 
gives preference to certain drugs over other drugs that treat the same 
condition.

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